“Start Quote

Rising wage pressure in emerging markets is the biggest concern right now”

End QuoteArjuna MahendranHSBC Private Bank

While the growth of the emerging economies has been fascinating, sustaining the current rate of increase is a tall order for policy-makers.

"Strong growth in most developing economies has contributed to a new set of global challenges," says the World Bank in its June 2011 edition of Global Economic Prospects.

The bank says "higher commodity prices, rising inflation, and the possible return of destabilising capital inflows as monetary policies tighten and interest rates rise" are some of the biggest threats.

For their part, analysts say the biggest headache for policy-makers is that all these problems are interrelated.

"The growth of Asian economies has meant a complete shift in the economic landscape," says Arjuna Mahendran of HSBC Private Bank.

"First, you have people from rural areas migrating to urban centres, that has seen urbanisation reach exponential proportions," he says.

This has resulted in a boom in demand for construction material, driving up commodity prices.

He adds that as ordinary people start benefiting from their countries' new-found success, the problems become still more complex.

"Rising wage pressure in emerging markets is the biggest concern right now," he says.

As people have more disposable income, they tend to spend more, hence driving up demand and pushing up consumer prices, he adds.

Mr Mahendran says governments have to work towards tightening their monetary policy to rein in higher prices.

Capital inflows

Rising prices of food and essential commodities have threatened to derail growth in Asian economies

However, rising interest rates are an even tougher test for policymakers in the region.

As interest rates in developing economies rise, while those in the developed world remain lower, investors are pumping huge amounts of money into the region.

That is driving up property prices and creating potential problems in the medium to long-term future.

However, the International Monetary Fund (IMF) says that if managed properly, the capital inflows can be turned into an advantage.

"Capital flows to Asia are not only a challenge, but also an opportunity to facilitate medium-term rebalancing," the IMF says in its Regional Economic Outlook for Asia and Pacific.

"The question is how best to channel capital inflows toward financing broader-based growth, and in particular toward boosting investment," the fund adds.

Ms Seethepalli, of the World Bank, explains how this can work.

"The challenge is how to make sure that these inflows are not short-term, but go in to long-term investment," she says.

Ms Seethepalli says that as the public sector funds in most developing economies are already overstretched, governments can use private capital flows to fund and finance infrastructure projects in their countries.

She says that not only will this speed up infrastructure development, a key to maintaining growth in emerging economies, but it will also lower the risk of formation of asset bubbles, as capital is channelled towards the creation of infrastructure assets.

'West to East'

The growth of the Asia-Pacific region has been driven by a boom in its export sector in the past few years.

However, analysts say that the region's economies now have to take advantage of growing demand at home in order to maintain the momentum.

"Asian economies focused on export-led growth," says Ms Seethepalli of the World Bank. "They can't expect any more export stimulus to come from outside, so growth has to be offset by domestic demand."

The IMF says that the region needs to build a solid base going forward.

"Such a platform would depend on reducing inequality; raising employment prospects, which would also guard against risks to social stability; and continued efforts to rebalance growth by strengthening private domestic demand," the fund says.

Analysts say that if the region's economies can achieve the delicate balance between keeping monetary policies tight and maintaining growth, the future belongs to them.

"The shift of economic power from West to East will continue, and Asia-Pacific will remain the most attractive economic region for the next 20 years," says Mr Biswas.

Share this page

From Monday 15 April 2013 we will no longer be updating the Asia Business index. Instead we will be putting our efforts into covering Asian stories as part of the main business pages. Please follow the link to Business at the top of the page or on this story to see them.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.